Essays on imperfect information, macroeconomic fluctuations, and nominal rigidities

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2010.Cataloged from PDF version of thesis.Includes bibliographical references.The first essay empirically models of aggregate fluctuations with two basic ingredients: agents form anticipations about the future based on noisy sources of information; these anticipations affect spending and output in the short run. Our objective is to separate fluctuations due to actual changes in fundamentals (news) from those due to temporary errors in the private sector's estimates of these fundamentals (noise). Using a simple model where the consumption random walk hypothesis holds exactly, we address some basic methodological issues and take a first pass at the data. First, we show that if the econometrician has no informational advantage over the agents in the model, structural VARs cannot be used to identify news and noise shocks. Next, we develop a structural Maximum Likelihood approach which allows us to identify the model's parameters and to evaluate the role of news and noise shocks. Applied to postwar U.S. data, this approach suggests that noise shocks play an important role in short-run fluctuations. The second essay experimentally examines whether looking at other people's pricing decisions is a type of heuristic, a decision rule that people over-apply even when it is not applicable. such as in the case of clearly private value goods. We find evidence that this is indeed the case. individual valuation of a purely subjective experience under full information, elicited using incentive compatible mechanism, is highly influenced by values of others. As the third essay shows, this result can shed light on price rigidities. Inspired by the experimental results of the second essay, the third essay develops a model of slow macroeconomic adjustment to monetary shocks. The model exploits the idea that buyers are imperfectly informed about their nominal valuation. I proceed in three steps. First, I develop a mechanism for price rigidities. My mechanism captures the notion that firms are reluctant to increase prices after an increase in demand or costs because it creates a disproportionate adverse reaction among consumers. These reactions arise endogenously for purely informational reasons. The key assumption is that some consumers are better informed than others about monetary shocks. If few consumers are informed, equilibria with nominal rigidity exist. In these equilibria firms do not change prices even though they are arbitrarily well informed, and have no menu costs. Moreover, if the proportion of informed consumers is low enough, these equilibria dominate equilibria with flexible prices. Second, I show that when firms do not change prices they inflict an informational externality on other firms. Consumers buy goods sequentially, one after the other, and change their beliefs about shocks when they see prices change. Therefore, when firms do not change prices, consumers do not learn. This hurts both firms and consumers. Third, I study the dynamic responses of output and inflation to shocks. Because of the informational externality learning is initially slow, the responses are delayed and hump-shaped. The responses are also asymmetric - prices increase faster than they decrease, and therefore negative shocks trigger larger output responses than positive shocks.by Jean-Paul L'Huillier.Ph.D